An insightful e-mail this morning from my colleague Pete Boettke prompted me to ask myself: What are the most regrettable missteps taken by mainstream economists? The list below is solely my own; its entries are ranked in no particular order; and this list unavoidably reflects my own interests and areas of professional focus over the 40 years that I’ve been studying economics.
Economics has, for all of its unquestioned successes, failed to be as revealing and as useful as it can be because too many economists…
… equate competition with price-taking – that is, equate competition with the condition under which any seller (buyer) that raises (lowers) the price at which he offers to sell (buy) will lose all customers (suppliers) – and, hence, too many economists insist that real-world situations that aren’t marked by complete price-taking behavior are situations that are infected by something called “monopoly power”;
… assume that competition in reality must look like what competition in economics textbooks or journal articles looks like – that is, too many economists fail to understand that workable business practices and market structures themselves are, like market prices, also the results of the competitive discovery process and are always changing in unpredictable ways;
… continue to fail to appreciate the role of entrepreneurship;
… continue to fail to adequately appreciate human-beings’ creativity at solving problems and at better satisfying their desires;
… fail to adequately appreciate the countless ways in which competitive forces can and do play out in reality;
… formulate macroeconomic theories (and policies) using carelessly conceived aggregates (for example, “the” capital stock, called K) while ignoring the formation and role of relative prices;
… ignore the influence of culture and the richness of human motivations;
… ignore the lessons of public-choice economics (despite the fact that some major contributors to public-choice analysis, such as my late colleague Jim Buchanan, were awarded Nobel Prizes);
… occasionally practice naive empiricism – that is, too many economists occasionally insist that all that we can really know about the economy comes from what the quantitative data tell us, and that all that is relevant about the economy are those things that we can observe and measure;
… mistake mathematical wizardry for insightful and important analysis;
… model the economy, and think about the economy, as if its purpose is to maximize something – and, as a result, most economists fail to study exchange with due care and consideration;
… treat international trade as if it is something special and different in essential ways from trade generally (see also here.);
… have failed to fully appreciate the greatness of Armen Alchian and Gordon Tullock, who should have won, but did not win, Nobel Prizes.
